Earned Income Tax Credit (EITC)

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low-income working individuals and families. Congress originally created the tax credit legislation in 1975, in part to offset the burden of social security payroll taxes. EITC is designed to “make work pay.” It rewards low-wage work by decreasing the taxes that low-wage workers pay on their earnings and by supplementing their wages. The intention is to move a family with a full-time minimum-wage worker above the poverty line, so as to avoid raising children in poverty.

The EITC is the largest poverty-reduction program in the U.S. According to a study by the Center on Budget and Policy Priorities (CBPP), the EITC lifted an estimated 6.6 million people out of poverty in 2009, including 3.3 million children. The poverty rate among children would have been nearly one-third higher without the EITC. The EITC lifts more children out of poverty than any other single program or category of programs. 

For tax year 2008, approximately 24 million taxpayers received over $49 billion in EITC benefits. The average net EITC amount was $2,068. However, the IRS estimates that between 20 and 25 percent of eligible taxpayers are not taking advantage of the credit. Studies have shown that the EITC generates large decreases in poverty and substantial increases in employment, as well as decreasing the number of single parents receiving cash welfare. It also produces a “multiplier effect”; it is estimated that every $1 paid out in the EITC generates $1.50 to $2.00 in local economic activity. The EITC does not generally affect eligibility for Medicaid, Supplemental Security Income (SSI), SNAP benefits (food stamps), or low-income housing. Unlike other tax provisions, the EITC is supported by both progressives and conservatives because of its anti-poverty, incentive-to-work structure.

The EITC works by reducing the amount of federal tax owed by those who claim and qualify for the credit. What makes it so effective is that the EITC is fully refundable; if a tax filer's EITC exceeds the amount of taxes owed, he/she gets a full refund of any remaining amount, even if the worker’s tax liability is zero. In order to receive the EITC, low-income workers must file a tax return (even if they do not owe any federal income tax) and the amount a family receives from the EITC depends upon their combined earned income and number of children. As a family’s income rises, EITC benefits are gradually phased out on a sliding scale.

Chart from Center on Budget and Policy Priorities, www.cbpp.org.

Here are the specific 2009 maximum eligible incomes and benefits:

EITC Improvements in the American Recovery and Reinvestment Act

In February 2009, the House and Senate passed the American Recovery and Reinvestment Act of 2009 (ARRA), which included several EITC improvements for tax years 2009 and 2010. First, Congress addressed the issue of the "marriage penalty" in the EITC. Before ARRA, if an EITC-eligible single parent chose to marry another low-income worker, they both could lose some or all of their EITC because the couple must combine their incomes for EITC purposes. Since the EITC phases out at higher incomes, they risked reducing their credit or losing their eligibility altogether. ARRA mitigated this penalty by raising the income levels for married couples thus allowing them to have a higher combined income without losing their EITC.

Congress also expanded the EITC benefit for larger families. Families with three or more children are more likely to be low-income than smaller families. However before ARRA, the EITC made no adjustment for these families; they were eligible for the same credit amount that two children households received despite having higher expenses. Because of ARRA, families with three or more children can now receive an EITC benefit of up to 45 percent of their earned income, as compared to 40 percent for families with two children.

These much-needed changes have benefitted 7 million people, keeping 3 million out of poverty.

Expanding EITC Benefits for Workers without Children, Married Couples, and Larger Families Past 2010

The EITC has created enormous benefits for American families for the last thirty years. However, there are ways to make it more effective in reducing poverty. One area of concern is the huge discrepancy in benefits between tax filers with children and those without children. In 2009, a taxpayer with no children is eligible for less than one-tenth the benefit a family with two children received ($457 vs. $5,028). This amount, at best, will offset only a portion of the worker’s federal taxes, and not supplement income as was intended. According to the Brookings Institution, a single worker with no children earning income at the 2008 poverty line ($11,014) would owe nearly $1,000 in federal taxes even after receiving the EITC. This also has an effect on non-custodial parents. Even though these parents have child support obligations, because their children live elsewhere, these parents cannot claim the larger EITC parents with children receive. They are considered adults without children and can only claim the much-lower credit mentioned above. At a time when the economy is struggling and workers are hurting, we should not be adding salt to the wound by taxing low-income workers into poverty for simply playing by the rules. Congress should triple the EITC for workers without children.

RESULTS also urges Congress to make the EITC changes in the ARRA law for married couples and large families permanent. If no action is taken, these changes will disappear in 2011, thus hurting families who need help most. President Obama's FY 2011 Proposed Budget released in February, 2010, would permanently extend the ARRA improvements to the EITC. It would:

• continue the $5,000 marriage penalty relief at a cost of $14.9 billion for ten years, and
• continue the enhanced EITC for families with three or more children at a cost of $15.2 billion for ten years.

In order for these enhancements to become law, Congress will have to find ways to raise revenues. The President's budget would do that. You can read more about it on the Center for Budget and Policy Priorities' website.

Additional Resources:

RESULTS Economic Opportunity Recent Developments Page

Internal Revenue Service EITC overview

The Center on Budget and Policy Priorities’ (CBPP) Policy Basics: The Earned Income Tax Credit and 2009 Earned Income Tax Credit Outreach Kit

Brookings Institution’s Earned Income Tax Credit Series

National Women’s Law Center’s Tax Credits Outreach Campaign materials